Did you know there are some financial metrics that can provide clues of a potential multi-bagger? Typically, we’ll want to notice a trend of growing return on capital employed (ROCE) and alongside that, an expanding base of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. In light of that, when we looked at Tong Yang IndustryLtd (TPE:1319) and its ROCE trend, we weren’t exactly thrilled.
Return On Capital Employed (ROCE): What is it?
Just to clarify if you’re unsure, ROCE is a metric for evaluating how much pre-tax income (in percentage terms) a company earns on the capital invested in its business. The formula for this calculation on Tong Yang IndustryLtd is:
Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets – Current Liabilities)
0.045 = NT$1.3b ÷ (NT$36b – NT$7.5b) (Based on the trailing twelve months to June 2020).
Therefore, Tong Yang IndustryLtd has an ROCE of 4.5%. On its own, that’s a low figure but it’s around the 5.4% average generated by the Auto Components industry.
Above you can see how the current ROCE for Tong Yang IndustryLtd compares to its prior returns on capital, but there’s only so much you can tell from the past. If you’re interested, you can view the analysts predictions in our free report on analyst forecasts for the company.
So How Is Tong Yang IndustryLtd’s ROCE Trending?
There hasn’t been much to report for Tong Yang IndustryLtd’s returns and its level of capital employed because both metrics have been steady for the past five years. It’s not uncommon to see this when looking at a mature and stable business that isn’t re-investing its earnings because it has likely passed that phase of the business cycle. With that in mind, unless investment picks up again in the future, we wouldn’t expect Tong Yang IndustryLtd to be a multi-bagger going forward. With fewer investment opportunities, it makes sense that Tong Yang IndustryLtd has been paying out a decent 48% of its earnings to shareholders. Unless businesses have highly compelling growth opportunities, they’ll typically return some money to shareholders.
What We Can Learn From Tong Yang IndustryLtd’s ROCE
We can conclude that in regards to Tong Yang IndustryLtd’s returns on capital employed and the trends, there isn’t much change to report on. Although the market must be expecting these trends to improve because the stock has gained 43% over the last five years. Ultimately, if the underlying trends persist, we wouldn’t hold our breath on it being a multi-bagger going forward.
If you’d like to know about the risks facing Tong Yang IndustryLtd, we’ve discovered 1 warning sign that you should be aware of.
While Tong Yang IndustryLtd isn’t earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.
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